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Thursday, September 1, 2011

Selling gold and silver

One of the funniest films of the 1980s, Trading Places, depicted manipulating the commodity market for orange juice. Four years earlier in real life, the Hunt brothers of Texas had tried to corner the market in silver. They were thwarted, but in the process they briefly drove the price of silver above $50 per ounce. It fell to the vicinity of $5, where it stayed for over 20 years.

As I watch gold at $1800 and silver at $40, I'm reminded of the lunacy in Trading Places. Precious metals are in a bubble. As in all bubbles, there is a veneer of justification for these high prices. Overseas investors continue to flee the U.S. dollar, in part because the Fed says it will continue its policy of easy money at low interest rates to stimulate the U.S. economy. Where else can overseas money go? Not into stocks or real estate (which aren't attractive anyway). The Euro has its own problems. There aren't enough Swiss francs to meet demand. Some of this wealth finds its way into gold and silver. That's the veneer.

Here in the U.S., many citizens have legitimate concerns about federal fiscal policy. But the domestic demand for gold and silver is largely attributable to relentless marketing by people who stand to profit from the bubble. This is not the naive but well-intentioned "irrational exuberance" that we saw in the 1990s. Rather, it's cold-hearted greed that uses fear to compel panic buying. After three years of economic pain, the American public is receptive to fearful messages; this week the Raleigh News & Observer carried an advertisement that read "Dow 5000". Misguided if not dangerous ideas from far-right lunatics like Ron Paul are creating fear too.

I recently heard a radio advertisement in which unnamed, self-professed "experts" predicted gold will go to $5000 and silver to $200. There is only a microscopic probability of such prices. But if glib speculators can scare half the public into buying gold and seduce the other half into chasing a triple-your-investment scheme, profits will abound. Of course, those experts will be selling throughout the process.

My suggestion and my plea: don't subscribe to fear and don't fall victim to speculators. Instead, take advantage of the bubble! I've recently sold my loose gold and silver such as my class ring from high school and the Kennedy half dollars that I obtained while cashiering for my grandfather's barber supply business in the 1960s. Every bubble is a selling opportunity.

And by the way, look out for counterfeit gold and silver coins. That's the topic of another blog to come.